October 11, 2010 (Chinavestor) The number of overbought China stocks is clearly on the rise as the following chart testifies. Fuqi International (NASDAQ:FUQI) rose a staggering 25 percent plus on Friday, volume over three times average. Food stocks jumped universally; Origin Agritech (NASDAQ:SEED), AgFeed Industries (NASDAQ:FEED), Zhongpin Int. (NASDAQ:HOGS) all are overbought and susceptible to take a breather. Food related Agria Corp. (NASDAQ:CAGC) jumped just shy of 20 percent and is in the danger zone. Gushan Environmental Energy (NYSE:GU) is screaming off the overbought chart, similarly to Harbin Electric Inc. (NASDAQ:HRBN).
While it may be true that Fuqi International (NASDAQ:FUQI)is trading the closest to theoretical highs, it doesn't necessarily mean the stock is the most overbought China play at the moment. A usually sleepy Gushan Environmental Energy (NYSE:GU) jumped 53 percent last week, suggesting the rally may have been too much. China Integrated Energy (NASDAQ:CBEH), another bio-diesel producer, advanced 22.41 percent last Friday suggesting the increase in energy prices have finally trickled down to the sector. While it may seem like a surprise,we like to point out what we wrote in the October Newsletter released on October 1st.
"High energy prices failed to lift oversold Gushan Environmental Energy (NYSE:GU) and China Integrated Energy (NASDAQ:CBEH) so far, suggesting upside potential exceeds downside risk. Both bio-diesel producers were among the worst performers in September but speculative investors might want to give them a second look." Challenges and Opportunities for the Fall of 2010—Part II"
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Another group of stocks that are overbought are food stocks. Origin Agritech (NASDAQ:SEED) looks very similar to AgFeed Industries (NASDAQ:FEED) on the overbought chart below. Both stocks are trading well above their normal trading range and have approached theoretical highs. While it may seem like a warnings sign, investors have to remember that overbought is not necessarily bearish. It just suggests that current price increase is too sharp and the stock will have to slow down.
Food related Zhongpin Int. (NASDAQ:HOGS) has been on the overbought chart for most of last week but with a 7.4 percent rally on Friday, the happy times may not be over yet. Especially after Agria Corp. (NASDAQ:CAGC) released a statement to the press, suggesting shorts are behind current weak stock price. The company is seeking a big 4 auditor and is standing behind its numbers. China Green Agriculture (NYSE:CGA), another Chinese fertilizer company, may benefit from such a move as well. Volume for China Green Agriculture (NYSE:CGA) jumped in tandem with that of Agria Corp. (NASDAQ:CAGC) last Friday, suggesting investors pay attention to details.
Investors wonder how long the winning streak may last for Harbin Electric (NASDAQA:HRBN). The stock just reached $20 and it looks increasingly likely that it may find a resistance level right there.
New Oriental Education (NYSE:EDU) continues to lead the oversold China stock list. But its outlook is improving as the stock have started to move away from theoretical lows. Despite heavy losses, outlook is not that great for Tongxin International (NASDAQ:TXIC) yet. The stock hasn't reached theoretical lows yet, leaving more room to the downside. But investors have to be careful with technical indicators. Current weakness doesn't mean it has to go all the way down.
Overbought A technical condition that occurs when prices are considered too high and susceptible to a decline. Overbought conditions can be classified by analyzing the chart pattern or with indicators such as the one above. A sharp advance from $15 to $30 in 2 weeks might lead a technician to believe that a security is overbought. Or, a security is sometimes considered overbought when the stock is trading out of its trading envelope and is approaching the theoretical high. It is important to keep in mind that overbought is not necessarily the same as being bearish. It merely infers that the stock has risen too far too fast and might be due for a pullback.
Oversold A technical condition that occurs when prices are considered too low and ripe for a rally. Oversold conditions can be classified by analyzing the chart pattern or with indicators such as the one above. A sharp decline from $30 to $15 in 2 weeks might lead a technician to believe that a security is oversold. Or, a security is sometimes considered oversold when the stock is trading below its trading envelope and is approaching theoretical lows. It is important to keep in mind that oversold is not necessarily the same as being bullish. It merely infers that the security has fallen too far too fast and may be due for a reaction rally.